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Old 08-12-2009, 09:31 PM   #21
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If you had purchased the Vanguard Value Index fund in the same amounts and on the same days that you purchased your BRK shares, how does it compete?
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Old 08-12-2009, 11:12 PM   #22
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If you had purchased the Vanguard Value Index fund in the same amounts and on the same days that you purchased your BRK shares, how does it compete?
Interesting thought.

Between June 2001-July 2002, not so good:
Berkshire Hathaway Inc. - Google Finance
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Old 08-13-2009, 09:18 AM   #23
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Yikes, that doesn't look good for the fund. Almost all of my purchases of Berkshire were from late 1999 to early 2000, so that graph is pretty spot on for me. I had some dumb buys in late 1998 to early 1999 when I first got started buying Berkshire and was just buying when I got the money and not paying attention to the price. Not a good strategy.

Speaking of that, when you "rebalance" a group of funds, does that force you to only buy low and sell high?
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Old 08-13-2009, 09:52 AM   #24
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I don't think I trust that chart since such charts are notorious for not showing the effects of re-invested dividends.

When you rebalance, you tend to sell high and buy low. Most of the benefits of rebalance stem from going from bonds to stock and vice versa. I personally don't think that rebalancing a 100% stock portfolio will have as great an effect. It will have some effect though.
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Old 08-13-2009, 10:19 AM   #25
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I don't think I trust that chart since such charts are notorious for not showing the effects of re-invested dividends.
Link to a better one if you can find it. Berkshire's cost basis doesn't change...
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Old 08-13-2009, 10:32 AM   #26
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Doesn't seem that weird to me, and it's been the subject of some discussion in our family
No, I said wierd, and that's a completly different thing. Gotta use that spell checker........

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You've dealt with this volatility before, so otherwise what's changed?
It's more of a "I can't make a mistake now" thing. When I was working (owned a small business) the money was always flowing in (good timing, not much skill) and so my mistakes could be covered up. Now the lack of money flowing in has me pretty much locked up mentally.

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Is it a change in risk profile, or is it more of a desire not to have to work so hard to take care of the portfolio?
I don't know, but I'm finding out that Berkshire (and my business) were kind of my one trick ponies and I'm feeling a little like the tide has gone out and I don't have any clothes on. Know what I mean? I just don't know what I'm doing out of my little Berkshire circle.

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Looks like you just wrote yourself an asset allocation plan…
What? My plan was to come up with a group of bond funds/ stock index funds to put my non Berkshire stuff in, and when I sold some Berkshire off (at the right price) I could replenish cash or fund those funds. Those would be my only choices so I don't get distracted away from my circle. I'm easily distracted it seems.

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… and you could maybe add Vanguard's Wellesley to it.
I've been told it's not wise to hold that in a non tax advantaged account. I have very little (4.5%) tax advantage accounts, so that's a challenge, right?

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Did I mention that Tilson thinks Berkshire is still 30% undervalued? Admittedly he's a Berkshire cheerleader, but unlike Cramer or TMF he has a lot of shareholders to answer to. So would you buy more, sit on what you have, or sell?
I like the book plus float valuation method for a quick look, and that's about 180B now after quarter 2. It's trading at around 158B now, so that's about 12% undervalued now, although it usually trades a little higher than BV plus float at some point during the year (last 10 years around 110% average) so it could be around 20% undervalued right now. No, I would not buy any at these levels because that's not enough room for error, and it's volatile enough where I think you can buy it cheaper if you wait. I'm also not selling at this point either.

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Plenty of room before you have to sweat liquidating losing stocks in a bear market.
I'm still unsure how much cash to keep. I have 16.5 in taxable cash that will fund me for 7.5 years or 6.5 years if wife quits working. I think that's too much to leave sitting around earning nothing, and if I had a good AA including bond funds I would like to do something with that. And yes, I'm funding some of the spending from the liquidation of the value account, but I still need to come up with a plan for all that cash. I don't really feel like I can buy MORE Berkshire at this point at 48%, so I need an alternate place for the cash.

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Better still, are you/spouse going to someday collect Social Security or other pensions? Are they factored into your asset allocation?
I am eligible, but it is not factored in. I don't think it will be there in 20 years, or if it is there I doubt it will look like it does now so I'm leaving it out. If SS is there, then that will be a nice surprise.

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Am I adding these numbers correctly to come up with 8.6% of your total portfolio value? If these assets are annoying you too then they could be the next to be liquidated for spending cash.
Yeah, most are too small to jack with IMO. A distraction. None of them have any gains to speak of at this point. In fact, nothing I have has gains other than Berkshire, and I have lots of losses from the "value" fund to use up. I don't have to "use up" all those losses this year do I? Can't remember how that works. I need a tax loss harvest strategy also.

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If you moved the 18.3% "deep value" account and the other 8.6% into Wellesley, then how much of the Berkshire and the angel assets would you need to maintain a 4% SWR or less? In the highly unlikely case that Berkshire went to zero, what would your SWR be?
If Berkshire and angel went to 0 then I would be at 5%. What are the probabilities? Not high for Berkshire, but probably high for the angels (I'm not doing any more of those btw-- not enough money to diversify properly and not enough good ideas). If brk fell by 50% and angels fell to zero I would be at 3.38%, with wife working and all rentals holding. The angel deals I did when I was working and had a higher risk tolerance. I can't sell them so we shall see. Very risky, but fun.

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One approach would be to assume that your spouse stopped working and half of your rentals were vacant. Figure out your spending and how much you'd need to support a 4% SWR, then put that amount into Wellesley/cash and put the rest into whatever asset classes you want-- like Berkshire & angel investments. The portfolio is sort of a "dumbbell" distribution with "low-volatility" assets at one end of the bar and "high-volatility" assets at the other end.

Interesting. Should I use Wellesley since it is not tax efficient or a tax free bond fund as others have suggested since this is all in a taxable account? If I did that I would need to reduce the Berkshire by about 70% and it would end up being 14% of the total portfolio, so I guess that's doable. So put everything into Wellesley? No bond or stock funds or international and all that other stuff? I'm such a fund moron............

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If you're uncomfortable shedding Berkshire now, what about converting to "B" shares and selling out-of-the-money call options? Pick a price at which you think Berkshire is more than fairly valued, write a contract, and collect the premium. If the price goes up above your strike price then you lose the shares and "solve" your asset allocation problem while making a little extra money on the side. If they stay flat you make a little extra money. If they go down, you weren't going to sell the shares anyway. But call options offer a way to set a sell-stop while keeping your emotions out of the process. They're new and they don't have a lot of volume yet so pricing is probably inefficient, but the Gates Foundation is doing a wonderful job of raising the "B" share daily volume. As volume rises it's not unthinkable that Berkshire could end up in the S&P500 in the next 5-10 years, and their options pricing will become more efficient.
Oooo, now that's interesting. What are the premiums? How do I do that? Have you done it? I'm not uncomfortable selling the shares, but just don't like the price yet so this might work. What if I write the call then change my mind and want (or need) to sell before it hits that price? Have I locked up the shares in other words?
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Old 08-13-2009, 11:34 AM   #27
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It's more of a "I can't make a mistake now" thing. When I was working (owned a small business) the money was always flowing in (good timing, not much skill) and so my mistakes could be covered up. Now the lack of money flowing in has me pretty much locked up mentally.
If brk fell by 50% and angels fell to zero I would be at 3.38%, with wife working and all rentals holding.
I don't know, but I'm finding out that Berkshire (and my business) were kind of my one trick ponies and I'm feeling a little like the tide has gone out and I don't have any clothes on. Know what I mean? I just don't know what I'm doing out of my little Berkshire circle.
It's both a logical/financial and an emotional decision, but if your SWR is still below 4% when your portfolio goes to hell then you're probably going to be OK. You seem to have quite a bit of faith in Berkshire & Wellesley and rentals, but I'm not sure how you'll develop the same faith in other asset classes. So if your SWR will be OK and you're comfortable with these then why go looking for more excitement?

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What? My plan was to come up with a group of bond funds/ stock index funds to put my non Berkshire stuff in, and when I sold some Berkshire off (at the right price) I could replenish cash or fund those funds. Those would be my only choices so I don't get distracted away from my circle. I'm easily distracted it seems.
I didn't read your Bogleheads post, but if you're not comfortable with their recommendations on Vanguard funds then you're gonna have a heck of a time finding something to be comfortable with. It just seems like the easiest path is to stick to assets that you're already familiar with and let things settle out for a while. It could be as simple as setting the angel investments aside and splitting the remaining assets 1/3 each among Berkshire, Wellesley, and cash. The point is finding something you're both emotionally & financially comfortable with as well as keeping it low-maintenance.

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I've been told it's not wise to hold that in a non tax advantaged account. I have very little (4.5%) tax advantage accounts, so that's a challenge, right?
There's a lot of bond income that would be taxed at your marginal income rate instead of your cap-gains rate. It'd probably put you into the 15-25% bracket. Can you put a number on it? How painful would that be? What about holding Wellesley as much as possible in your tax-deferred accounts and Berkshire as much as possible in taxable accounts?

I'll defer to the expert opinions of the board's experienced Vanguard investors, but if Wellesley seems pretty tax-efficient by comparison to the rest of the fund choices out there. I think low expenses and low turnover are far more important than tax efficiency.

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Originally Posted by cardude View Post
I'm still unsure how much cash to keep. I have 16.5 in taxable cash that will fund me for 7.5 years or 6.5 years if wife quits working. I think that's too much to leave sitting around earning nothing, and if I had a good AA including bond funds I would like to do something with that. And yes, I'm funding some of the spending from the liquidation of the value account, but I still need to come up with a plan for all that cash. I don't really feel like I can buy MORE Berkshire at this point at 48%, so I need an alternate place for the cash.
The technical term for the angst you're experiencing is "chasing yield".

You're already putting Berkshire to work and you're balancing volatility with Wellesley. They're going to earn a fairly steady return, Wellesley has lots of bond exposure, and their selection is probably going to have a much greater influence than having the cash chasing another basis point or two in an aggressive bond fund or a dividend fund.

I think your cash level lets you sleep at night. It may also preserve marital harmony and enable your spouse to stop working. Which is worse-- agonizing over the "lost income" of a few basis points, or agonizing over volatility? How do you want to feel during the next bear market? Would you rather have only a couple years' cash on hand and know that the rest of it will do fine as soon as the bear market recovers, or would you rather be comforted with the thought that this bear market really sucks but you have plenty of cash to ride it out?

There's not necessarily a right answer here, only your preferences and your comfort level. If you're not comfortable with volatility then I suspect you're gonna be very uncomfortable with a low cash balance.

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Originally Posted by cardude View Post
Yeah, most are too small to jack with IMO. A distraction. None of them have any gains to speak of at this point. In fact, nothing I have has gains other than Berkshire, and I have lots of losses from the "value" fund to use up. I don't have to "use up" all those losses this year do I? Can't remember how that works. I need a tax loss harvest strategy also.
Cap losses can be used to offset cap gains plus as much as $3000 of other income. After that the remaining cap losses can be rolled over indefinitely.

But if you're selling large chunks of Berkshire then you'll probably use up the cap losses fairly quickly. That's about as complicated as a tax-loss-harvest strategy needs to be. The point is not avoiding or even minimizing taxes-- that can't hurt you as much as your current volatility is hurting you. The point is to get to an AA you can live with, and then consider whether you need to mess with balancing cap gains & cap losses while you're rebalancing your AA. Again I think you'll gain far more in returns from a good AA and rebalancing scheme than you'll lose in taxes. You'll sleep better at night too.

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Originally Posted by cardude View Post
No bond or stock funds or international and all that other stuff? I'm such a fund moron............
Wellesley has you covered on the bond & stock sides, although I think it's mainly domestic. If you want international then go find some (like ETF EFV) but it's pretty highly correlated with domestic stocks. The only advantage is getting your returns away from the U.S. dollar, and yet during high volatility the international stocks seemed to drop just as fast as the U.S. ones.

If international assets seem like a tedious research project and you're not comfortable with them then blow it off and go with what makes you comfortable. Again investor psychology shows that an AA plan you'll stick with is better than the world's most sophisticated AA that makes you uncomfortable.

There are many asset allocations, and most of them work. "Paralysis by analysis" will only delay the solution.

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Oooo, now that's interesting. What are the premiums? How do I do that? Have you done it? I'm not uncomfortable selling the shares, but just don't like the price yet so this might work. What if I write the call then change my mind and want (or need) to sell before it hits that price? Have I locked up the shares in other words?
You're selling a contract that gives other investors the right to buy your Berkshire shares, in lots of 100, during a time period of at most three months. After the contract expires then you start over with a new contract. If the investors exercise their rights to buy Berkshire shares that you don't have (for example, you sold them last week) then you have a couple trading days to get more Berkshire shares and deliver them according to your contract. So technically you're not locked up, but most brokerages would prefer that your calls stay covered by owning the shares.

We haven't done this because 100 "B" shares (the minimum contract amount) is more than we're ready to deal in. We're also not interested in selling unless the share price takes off, at which point I'd heartlessly pull the trigger to rebalance. So no need for us to find a way to pry the shares loose from our hands, and no need to chase the options income. But it's a method that helps reluctant investors preserve gains and rebalance while being paid for their trouble.

If you're not already familiar with options trading then this is best handled through someone who is familiar with it-- like a financial advisor.
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